| China-Pacific War This installment of Broke Bob’s Ag Equity Report takes the contrarian view to China/U.S. relations and considers what happens if business minds in the two countries prevail over war hawks to find working trade relations. In our next installment, we consider how a China-Pacific war would affect world trade and the agribusinesses that support it. Late last year in San Francisco, Chinese President Xi Jinping bluntly told U.S. President Joe Biden that Beijing will reunify Taiwan with mainland China but that the timing has not yet been decided (Reuters). Xi told Biden in a group meeting attended by a dozen American and Chinese officials that China’s preference is to take Taiwan peacefully, not by force. U.S. military leaders had earlier predicted that Xi’s plan was to take the island country sometime between 2025 and 2027. However, Xi corrected them, saying that he had not set a timeframe. Makes a great story, right? Musclebound upstart Chinese challenger in red shorts talking smack across the conference room to the old beardless Uncle Sam lookalike. One can almost see the self-satisfaction in Xi’s eye and the stifled rage in Biden’s. I’ll take my popcorn lightly salted and hold the butter. But wait a minute! These two heavyweights have been posturing for almost a decade. Chairman Mao Zedong first introduced the term, reunification, as a peaceful way to retake Taiwan in 1956. If China/U.S. relations are doomed and Taiwan is the prize, why haven’t the Communist Chinese poured into the island country already? Hard Truths Most strategists believe China’s reluctance to invade Taiwan has less to do with Western military deterrence than the Middle Kingdom’s agriculture and energy supply lines. The hard truth is that with 1.42 billion people, China has 18% of the world’s population but only 8% of its farmland. If taken, Taiwan would increase China’s farmland by less than one percent. Moreover, arable land in China is declining at a rate of about eight-tenths of a percent per year. The land it has is farmed so intensively that China leads the world in rice, wheat, potato, and cotton production and is second in corn and canola production. Yet, according to its Ministry of Agriculture and Rural Affairs, more than 80% of its food consumption relies on some form of imports. One must ask how long China can keep its yields at such intense levels before it hits a production ceiling similar to what has occurred in Western Asia and much of the Indus Valley. China’s predicament on the energy front isn’t much better. The country imports about two-thirds of its crude oil, also making it vulnerable to energy supply disruptions. For all the tough talk from the Chinese media about U.S. double standards and hegemony, China imported $18B worth of soybeans and $6.9B worth of crude oil from the U.S. in 2022. “A cross-Strait war would disrupt regional economic activity, threatening the livelihoods of millions of Chinese” reported Denny Roy, a senior fellow at the Sydney -based Lowy Institute. “The resulting social turmoil could endanger Xi’s rule.” Born in 1953, Xi was six years old when China’s Great Famine started in 1959. Some 30 million starved to death and about the same number of births were lost or postponed over the next three years. China’s chaotic Cultural Revolution followed. Another one to two million died during that upheaval while Xi was in his teens. Many in China’s Central Committee, the supreme governing council, are old enough to remember the fear and chaos of famine and political instability. Oversold? Perhaps, therefore, China’s leadership isn’t in a hurry to invade Taiwan. Perhaps, instead, China is using the brinkmanship to negotiate better deals on multiple fronts. If true, the hype is creating investment opportunities worth exploring for hungry investors like yours truly, Broke Bob. The sentiment that Chinese equities are woefully undervalued is already showing up in some institutional circles. Speaking of a recent trip to the United States, Laura Wang, an equity strategist for Morgan Stanley Asia Limited, reported earlier this month she was positively surprised by the level of interest shown by US investors. “Despite the Chinese equity market’s overall lackluster performance, we were pleasantly surprised by how engaged investors are in China-related discussions and how up-to-date their knowledge is regarding whats going on in relation to macro, policy, and geopolitical developments,” Wang reported to clients on July 5. “Interest in identifying single-stock opportunities and upcoming themes for alpha generation is also very high.” One doesn’t have to look far to see value opportunities among Chinese blue chips when compared to their Western corollaries. One of the most popular comparisons is drawn between Alibaba Group Holding Limited and Amazon.com, Inc. Like Amazon, Alibaba provides technology infrastructure and marketing reach to help merchants, brands, retailers, etc. engage with users and customers. |
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At the July 13 close, Alibaba had an equity market value of $191 billion relative to Amazon’s value of $2.0 trillion. Yet, Alibaba generates twice the cashflow and pays a 2.5% dividend, whereas Amazon pays none. Alibaba’s stock sells for 18.5 times earnings where Amazon’s sells for 54.5 times earnings. |
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Another comparison can be drawn from U.S.-based Yum! Brands, Inc. and China-based Yum China Holdings, Inc., two firms that sell the same products…KFC, Taco Bell, and Pizza Hut. Yet, Yum China Holdings also operates growing labels like Lavazza, Little Sheep, and Huang Ji Huang stores, including new concepts, V-Gold Mall, a mobile e-commerce platform, and an online food delivery service. If the two companies were priced at the same earnings ratio, their values would be comparable. Yet, Yum China is valued at $12 billion, whereas Yum Brands is valued three times higher at $37B. Our last comparison looks at Sinofert Holdings Limited, a China-based fertilizer company, and Chicago-based CF Industries Holdings, Inc. The two companies sell for a comparable price-earnings ratio, but Sinofert’s latest quarter revenues grew by nearly 12% year over year, whereas CF Industries shrank by nearly -27%. The market values CF at nearly $13 billion, whereas Sinofert is valued at just a billion U.S. dollars. Yet, Sinofert pays double the dividend rate at nearly 5%. |
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These valuation comparisons illustrate how Western investors penalize companies affected by China-Pacific geopolitics. It all boils down to whether you believe China-Western relations will improve or further deteriorate. In Broke Bob’s next installment, we’ll consider the impact a China-Pacific war could have on agribusiness equities worldwide. Spoiler alert: it upends just about everything. This analysis comes to you from brokebob.com. Special note: This is not an equity research report, only a commentary on selected market trends. Nothing herein should be considered investment advice. Your author does not necessarily represent the opinions of Kevin Van Trump, The Van Trump Report, or its affiliates. With any investment decision, independent due diligence and professional advice is strongly recommended. Happy returns! |